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Bogus Bid Highlights Takeover Response By High-Strung Market

June 24, 1987

NEW YORK (AP) _ What turned out to be a false buyout offer for retailing giant Dayton Hudson Corp. shows how quickly a hair-trigger stock market can misfire in the rush to provide Wall Street with its most valuable commodity - information.

While the legal penalties of purposely releasing false financial news can be stiff, regulators and other market watchers interviewed Wednesday say there are few safeguards against short-term shocks from apparently valid claims that later prove bogus.

″Usually things like this don’t happen,″ said one government source who asked not to be named. ″...you’re stuck with taking people at face value.″

But some Wall Streeters contended that in many cases false information had only a marginal impact on professional investors, who already balanced the risks of making split-second decisions based on snippets of information against the potential rewards of using news quickly and correctly.

″People should be exposed to everything and make their own judgments as to what is real and what is valid,″ said one Wall Street arbitrager, who asked not to be named. ″...I think it’s a valid argument that whoever bought the (Dayton Hudson) stock, based on whatever reading they had about that announcement, was making a judgment″ on the validity of the news.

Tuesday’s report by Dow Jones News Service that a Cincinnati investment firm was making a $6.8 billion offer for Dayton Hudson sparked heavy trading in the stock of the Minneapolis-based retailer, which for weeks has been regarded as a prime takeover target.

Within hours, after a $9 a share runup in the stock’s price, the offer was revealed to be a false one telephoned to Dow Jones by P. David Herrlinger, a Cincinnati stock broker who later was hospitalized for an undisclosed problem.

By then, millions of Dayton Hudson shares had changed hands in stock exchanges across the country based on the bogus offer. By the close,the stock’s price was down by nearly $10 from the day’s peak, leaving speculators with millions of dollars in potential profits or losses.

Market regulators are trying to determine whether any of the trading was illegal. The New York Stock Exchange is analyzing trading in Dayton Hudson stock to detect possible signs of investors who may have bought or sold shares on the basis of illegal insider information.

The Securities and Exchange Commission also is investigating the incident, including the case of Herrlinger’s brother, Thomas Herrlinger, a broker for the E.F. Hutton & Co. Inc. office in Albuquerque, N.M.

Steve Nelson, a Hutton spokesman in New York, said the firm believed neither Thomas Herrlinger nor other Hutton employees were aware of the bogus offer until it was reported by Dow Jones News Service. Nelson said Hutton was cooperating with the SEC and was conducting its own investigation.

Officials also are investigating whether David Herrlinger attempted to profit from the stock’s activity following the buyout announcement, although so far there is no indication he owned or was speculating in the stock.

For the purveyors of news, the incident raised important procedural questions. Dean Robart, a former Wall Street Journal reporter who now publishes a newsletter on the business media, said that while news services need to protect their accuracy, they also know they could lose customers if they are routinely slow in reporting breaking financial developments.

Heightening Tuesday’s frenzy were weeks of speculation that Dayton Hudson was a takeover target and the company’s own disclosures that it had been approached by a potential suitor, Dart Group Corp.

So while Dow Jones had to verify the information called in by Herrlinger, it also was trying to be the market’s first source of news on a breaking major takeover.

″If you do too much checking and it’s legitimate, you’re going to get beat to the punch,″ Robart said. ″The most surprising thing to me is that it (cases like Herrlinger’s) doesn’t happen more often.″

Market watchers said many traders quickly grew suspicious of the Herrlinger offer, as witnessed by the stock’s peak at just $63, because there was no information about the financing for his massive deal and he was an unknown in investment circles.

But although the market in many cases can weed out suspicious information on its own, information that apparently has been validated can prove damaging. Dow Jones, for example, called Herrlinger back to confirm his identity and that he actually was an investment professional before running his story.

Everett Groseclose, managing editor of Dow Jones News Service, said he knew of no other bogus stories that had made it on the wire. There had been other attempts to get phony information on the wire but those were detected beforehand, he said.

″Most of the bogus story attempts we’ve had in the past were clear attempts to move the stock up or down,″ he said. ″This doesn’t seem to have been that way.″

The SEC prosecutes those who knowingly release false and misleading information about a potential merger or takeover, but aside from acting as a deterrent can not prevent such information from being released in the media.

″It’s a question of where in the balance you decide (that) they do what is reasonable to verify (information)...versus the desire to get really market- sensitive information across the wire as quickly as possible,″ said one government source.

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